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Should You Contribute to a 401k Without an Employer Match?

by Ryan Guina

The economic crisis has affected many companies here in the US, and as a result, many companies are slashing their 401k match and other benefits to conserve cash. The good news is that these cuts help keep companies profitable and may prevent many layoffs. The bad news is that employees are losing out on free money. You should reexamine your situation any time your benefits change.

Should You Contribute to a 401k Without an Employer Match?

In most cases it is still a good idea to contribute to a 401k plan, even without an employer match. Here are a few benefits to continuing your 401k contributions:

  • Automatic and guaranteed savings. 401k contributions are made automatically with each paycheck – you never have to worry about transferring money, writing a check, mailing a letter, etc. Automation guarantees you will make your investment on time.
  • Lower taxable income. Contributions to a Traditional 401k plan lower your taxable income because the contributions are invested with money that has not yet been taxed. This leads to the next benefit:
  • Tax deferred growth. Investing in a Traditional 401k plan means your contributions will grow without the drag of taxes until you make your withdrawals. Your money gets taxed when you withdraw it, and possibly at a lower tax rate if your tax bracket is lower in retirement than it is now.

Other considerations

It is usually a good option to continue contributing to a 401k without an employer match, but there are some other factors you need to keep in mind.

  • Expenses and fees. Many 401k plans have higher fees than you will find for comparable funds outside of the 401k plan. You may find it less expensive to invest on your own than through your 401k plan. If that is the case, look into investing in an IRA so you can continue investing in a tax advantaged retirement plan.
  • Investing in a 401k or IRA. You may decide to invest in an IRA instead of a 401(k) if you are eligible. Here are some differences between Roth and Traditional IRAs. You can open an IRA at almost any financial institution and you can find very inexpensive options at places such as Vanguard, Fidelity, T. Rowe Price, etc.
  • Retirement contributions and income limits. You will need to pay attention to the 401(k) contribution limits and Roth and Traditional IRA contribution limits. Be sure to note the associated income limitations of each. For example, if you are eligible for an employer sponsored retirement plan, deductible IRA contributions begin to phase out for single filers at an AGI of $55,000, and at $89,000 for married filers. If those income limits affect you, then you may wish to invest in a Roth IRA or a non-deductible Traditional IRA.

Continue investing

Just because you no longer receive free money doesn’t mean you should use that as an excuse to stop investing. Retirement investing is an important part of financial planning and you should continue investing even without a company match. The free money may be gone, but the tax advantages remain.


Published or updated September 28, 2009.
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{ 20 comments… read them below or add one }

1 SaveBuyLive

My current employer is lame and doesn’t bother to offer a 401 match. Instead, we have a pension plan which is constructed in such a way as to benefit only the elite employees who have been with the organization for decades.

My employer’s lameness aside I still make use of the 401. Why? Two reasons. One, it’s a good way to save for retirement. And I’ve maxed my IRA so the 401 is the next best option.

Two, it establishes a pattern of saving in my life. I could put it off, always waiting for the perfect retirement plan before I start saving, but the transition will be harder to make later in my career when there are more demands on my income. If I get used to living on less money and regularly dumping large sums into my retirement account, it will become a habit and will be second nature by the time I hit mid and late career.

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2 Ryan

SaveBuyLive: You can’t underestimate the benefits of getting into the habit of saving an investing. It’s so easy to forget about it if you don’t set it on autopilot.

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3 My Journey

Just wrote a post on other less obvious 401(k) benefits and you hit them all except two:
1) IRAs don’t allow for Loans
2) 401(k) Hardship withdrawals are more defined by the IRS

Neither great topics, but when an emergency hits you’ll be happy with your 401(k)

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4 Craig

Currently without either option there I am working on researching a Vanguard Roth IRA to open up and contribute to.

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5 Doctor S

It is a no-brainer if you ask me. Either way you are saving some sort of your income and lowering your taxable income if you are contributing pre-tax dollars. If your employer has a matching program then it is an even bigger no brainer!

@Craig Vanguard is a great option…. I highly reccommend it! LOL.

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6 MLR

My employer only matches 50 cents on the dollar up to a 4% contribution. I used to put in 8%. With the current economic climate I bumped it up to 11%, why not? I also max my Roth IRA.

Like SBL said, the main thing is creating a habit of saving. That money isn’t mine, its my future selfs.

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7 Ryan

MLR: Excellent job! My 401k plan isn’t great – it is currently .5% match up to 3%, for a total of 1.5% match. I max out my IRA as well. I know that in the long run it is a great idea!

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8 El Cheapo

My current employer has never offered matching, but I still contribute up to the max. For me, it’s almost piece of mind knowing that I’m putting money away for my future. Before it can reach my checking account, it goes straight to my 401K. I try not to check my 401K balance as well (especially now that everything has tanked). Anyways, my advice is contribute if you can and if you can’t, save as much as you can and contribute when things looks better.

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9 Kristen

My employer doesn’t match contributions to our 403b (the non-profit version of a 401k). I am investing in a Roth IRA instead. After I pay off the remainder of my credit card debt (hopefully within the next 10 to 12 months) I plan to also start investing in long-term life insurance.

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10 Ryan

Kristen: I would probably do the Roth IRA in your situation as well. I would definitely research life insurance before buying a policy as an investment. Some of them are full of fees and restrictions.

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11 SavingDiva

As a grad student, I could contribute to a 401k (they call it super saver or something), but there will be no matching. If I am able to contribute, I think a Roth IRA would be beneficial because my income is so low and I’m only going to be in graduate school for a few years.

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12 Slinky

I just had to make this decision. I’m diverting that money over into my Roth IRA. I’ve just graduated, so it’s unlikely I’ll ever pay less in taxes than right now. I also get better investment selections.

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13 drummer

I currently have non company matched 401k, problem is we only work have the
year Aug-Jan…should I stop putting money in until the company starts matching again?

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14 Ryan

Drummer, You may consider investing in an Roth IRA instead of a 401(k) if you are eligible and have not already maxed it out. This will help diversify your taxes in retirement and offer tax free growth until you make withdrawals. Here is more information on how to start a Roth IRA, and where to open a Roth IRA.

You don’t necessarily have to invest in a Roth IRA (they are just a good option for many people). You may find that your 401k is a better option for you. The important thing is to keep investing for retirement.

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15 Grant

Why dodge taxes at todays tax bracket if taxes are only going to be higher in the future? The 401(k) is a retirement plan for Uncle Sam, not you. Lets face it, the taxes that you’ll pay when you start withdrawing funds will reimburse Uncle Sam in the first 3-5 years of what he should have received and every dime after is his profit. You think taxes are going to be lower in the future with the Nat’l Debt quadrupling in the last 10 years? Former Comptroller of the US, David Walker, said “We’ll have to reduce federal spending by 50% or increase taxes by 60% just to stay afloat” (not verbatim, but you get the drift). Shooting for a lower tax bracket in retirement? Good luck. No mortgage deduction if your house is paid for, no dependents because they all moved out and now you are left with yourself and your 401K to live on. Have fun, I see it all the time. A roth is a step in the right direction, but still too many restrictions. Do some research and you’ll find the vehicle thats right for your goals, not Obamas.

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16 Ryan

Grant, you bring up a good point about future taxes. And unfortunately, you’re probably right – taxes will most likely increase. But a 401k plan can still benefit people today, especially those who are looking for current tax breaks, are near retirement, or those for whom this form of investing is the only tax deferred plan they qualify for.

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17 Grant

You are correct Ryan in that for some people, this may the only option they have this close to retirement. But the reality is, mainstream wisdom is telling the public to “stash their 401k as much as possible” is far too broad of a statement and it’s leading about 95% of people down the wrong road. Take Suze Orman for instance with her wide range of viewers from every end of the spectrum telling all of them that the IRA, Roth IRA and 401(k) are the best options. However, in an interview (that’s out there somewhere but I can’t recite the source), she only had 2-5% of her money in the market when it tanked in 08….because it was “too risky”. Diversification is great but even if you were 100% in bonds at the market downturn, you still lost a lot of money and for those close to retirement, that risk- if at all possible, should be avoided entirely with their core holdings. Sure, if all of the ducks are lined up in the right order, a 401k or some market exposure is warranted but my point is that 99.9% of people rely on this market to get them to their retirement goals and this should be the last place they place their money, not the first (like most do). Know what I mean? =)

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18 Liz

Grant, I completely agreed!

I think saving for retirement is a great idea and everyone should get into the habit of it. However, what most don’t understand is they’re still playing in the stock market. The key word is “playing” and worse yet, most give money to others to play for them without understanding the rules of the game.

When people talk about 401k, roth ira, and ira it is always associated with “savings” for retirement. The words savings usually means saving accounts, interest earnings, CDs, Money Market Account. Things that doesn’t decline numerically (but could decline because of inflation). 401k, roth ira, and ira are not savings accounts, they are simply investment account that you could diversify towards savings (bonds, cash), or gambling for a chance to win big (stocks). Funds are put together by fund manager with a combination of both the savings and gambling components (stocks). I like to call them dealers, meaning either way they’ll win. However unlike a game of poker where you’ll know the max number of cards and max number of players, so it is possible to calculate the probability of winning. The stock market allows for too many moving variables that make predictions unpredictable. Blindly purchasing stocks by yourself or from money managers is like investing in a business that you have no idea who runs it and what it does. If you’re ok with that then you should consider investing in my unknown business, atleast I won’t charge you commission or fee, and I could guarantee that you’ll make money when the business is actually doing well and not what the speculator think. And your chance of losing it all is only if the business fails and again not what the speculators think.

19 Daddy Paul

“Just because you no longer receive free money doesn’t mean you should use that as an excuse to stop investing.”
Great point. Too many people will say I will put the money in an IRA. Six months later no money has been put in the IRA.

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20 SanDee

I find myself interested in investing for my future but had problems beginning it in the past because of never understanding the best options for me. This is one of the situations I have found myself in where I am given the information and told to CHOOSE but am afraid of making the wrong decision so I make NONE. My mother didn’t make it to retirement age and I find myself wondering “WHAT’S THE POINT?”!

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